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Dollar rally halted on reduced rate hike expectations

Home >  Daily Market Digest >  Dollar rally halted on reduced rate hike expectations

Written by:
Myrsini Giannouli

08 December 2022
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Important Calendar Events

  • JPY: Bank Lending, Current Account, Final GDP Price Index, Final GDP
  • EUR: ECB President Lagarde Speech
  • GBP: RICS House Price Balance
  • USD: Unemployment Claims


The dollar’s rally was halted on Wednesday, on reduced rate hike expectations. The dollar index dropped from the 105.5 level to 105.0. US Treasury yields also withdrew, with the US 10-year bond yielding dropping from 3.5% to 3.4%.

Labour data released on Wednesday for the US were disappointing, putting pressure on the dollar. Pessimistic jobs data decrease expectations of a sharp rate hike next week, as a healthy labor market is required to enforce a more hawkish fiscal policy. Revised Nonfarm Productivity for the third quarter of the year rose by 0.8% against expectations of a 0.6% growth. Productivity is linked to labor-related inflation, with an increase in productivity pointing to a drop in wages. This was confirmed by Revised Unit Labour Costs for Q3 of 2022, which showed a 2.4% rise in wages, against the 3.1% predicted. 

The next US Fed monetary policy meeting is scheduled for next week on the 14th and traders are attempting to gauge the Fed’s intentions ahead of the meeting. A Fed blackout period has started on Saturday, which will last until the meeting, during which FOMC members do not deliver speeches that may reveal the central bank policy direction. The dollar maintained low volatility this week in the absence of more significant economic indicators and Fed rhetoric. 

Market expectations of future rate hikes were considerably trimmed in the past couple of weeks on cooling US inflation. US headline inflation printed at 7.7% year-on-year in October, compared to 8.2% in September. Fed Chair Jerome Powell delivered an unexpectedly dovish speech last week, stating that he sees rate hikes slowing down as soon as December.

The US Federal Reserve voted to increase interest rates by 75 basis points at its latest monetary policy meeting. The Fed has so far increased interest rates by a total of 375 basis points this year, bringing its benchmark interest rate in a range of 3.75% to 4.0%. Market odds are currently between a 50-bps and a 25-bps interest rate increase in December. Rate hikes are expected to taper off in 2023 as the central bank moves into a stable interest rate. 

US Unemployment Claims are scheduled to be released on Thursday and may cause volatility in dollar prices.



The Euro gained strength on Wednesday on robust Eurozone economic data. The dollar withdrew, and the EUR/USD rate climbed to 1.055. If the EUR/USD pair declines, it may find support at 1.029 and further down the parity level. If the currency pair goes up, it may encounter resistance at 1.061.

Economic activity indicators released on Wednesday for the Eurozone exceeded expectations. German Industrial Production, French Trade Balance, and Italian Retail Sales for October were higher than expected, boosting the Euro. EU Final Employment Change for the third quarter of the year rose by 0.3% against expectations of a 0.2% growth. Revised GDP for Q3 of 2022 also exceeded expectations, with the Eurozone economy expanding by 0.3% versus 0.2%. The economic outlook for the Eurozone seems to be improving, providing the ECB with some leeway toward tightening its fiscal policy. Many analysts, however, are predicting stagnation later this year and in the first quarter of 2023. 

ECB rhetoric remains hawkish, with ECB President Christine Lagarde stressing the need to bring Eurozone inflation down. Lagarde has also stated though that how far and how quickly rates must rise will be determined by several factors. 

In its latest monetary policy meeting, the ECB raised its interest rate by 75 basis points to 1.5%, the highest since 2009. Soaring EU inflation rates are forcing the central bank to hike rates aggressively to reduce price pressures. Market odds are currently in favor of a 50-bps rate hike at the ECB’s next monetary policy meeting. 

Eurozone headline inflation showed signs of cooling in November, after hitting an all-time high in October. Final Eurozone inflation dropped to 10.0% year-on-year in November from a record high of 10.6% in October, against expectations of a 10.4% print. 

ECB President Christine Lagarde is due to deliver a speech on Thursday, which may cause some volatility for the Euro.

EURUSD 1hr chart



The Sterling edged higher on Wednesday and the GBP/USD rate climbed to 1.220. If the GBP/USD rate goes up, it may encounter resistance at 1.234, while support may be found near 1.176 and further down near 1.035. 

The British Halifax HPI index, which is a measure of the housing industry's health, fell below expectations on Wednesday, putting pressure on the Sterling. The Halifax HPI index showed a contraction of 2.3% in the housing industry in November, against expectations of a drop of only 0.2%.

BOE Governor Andrew Bailey addressed the House of Lords last week in a speech that was less hawkish than expected, driving the Sterling down. Even though Bailey stated that the BOE was likely to continue raising interest rates, his stance was more moderate than expected, pointing to a slowing pace of rate hikes.

UK inflation hit a 41-year high in October, as annual CPI climbed to 11.1%, its highest value since 1981. October’s inflation exceeded September’s print of 10.1% and expectations of 10.7%. Inflation in the UK continues to rise, mainly due to the high cost of energy. Rising UK inflation is forcing the BOE to make some tough choices against a weak economic backdrop.

The British economy is still struggling and policymakers will have to assess how much tightening it can withstand to bring inflation down. UK monthly GDP for September dropped by 0.6%, against expectations of a more modest, 0.4% drop, indicating that the country is already in the grip of recession. Quarterly preliminary GDP for the third quarter of 2022 also came out negative, printing at -0.2%, compared to a 0.2% growth in the second quarter. The BOE predicts that the recession could last for almost two years, with expansion not expected again till mid-2024.

The next BOE monetary policy meeting is scheduled for next week on the 15th, a day after the Fed’s policy meeting. At their latest monetary policy meeting, BOE members voted to increase interest rates by 75 bps. Currently, the BOE’s interest rate is at 3.0% and the difference with the Fed’s rate of 4.0% is putting pressure on the Sterling. The BOE will also be introducing another round of gilt sales this month, as they shrink their balance sheets.

The British RICS House Price Balance indicator is scheduled to be released on Thursday and may affect the Sterling a little.

GBPUSD 1hr chart



The Yen gained strength on Wednesday, as the dollar retreated and the USD/JPY pair dropped to 136.3. If the USD/JPY pair declines, it may find support at 133.6. If the pair climbs, it may find resistance at 142.2 and further up at the psychological level of 145.0.

Leading Indicators were released on Wednesday for Japan, which is a composite index based on 11 economic indicators. Leading indicators for October exceeded expectations, rising to 99% versus 98.4% expected and 97.5% in September. 

BOJ CPI for October rose to 2.7% on an annual basis, against 2.0% in September and 2.2% predicted. Hotter than expected inflation in Japan is mainly due to the high cost of imported energy. National CPI rose by 3.6% year-on-year in October, beating expectations of a 3.5% rise. October’s data are much higher than September’s 3.0% print, indicating that Japan's price pressures continue to rise. 

Recent preliminary GDP data were disappointing, showing that Japan’s economy shrank in the third quarter of 2022 by 0.3%, against expectations of growth of 0.3% and 0.9% growth in the previous quarter. The annual Preliminary GDP Price Index printed at -0.5%, indicating that the Japanese economy is contracting, mainly due to the high costs of imported energy. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.

In its latest policy meeting, the BOJ left its monetary policy unchanged, as expected. The BOJ maintained its ultra-easy monetary policy keeping its main refinancing rate at -0.10%. Japan continues to pour money into the economy, while other countries are adopting a tighter fiscal policy. The difference in interest rates with other major Central Banks, especially with the Fed, puts the Yen at a disadvantage, driving its price down. 

Key economic activity and health indicators are due on Thursday for Japan, including the annual Final GDP Price Index and quarterly Final GDP.

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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